Archrock Around the Clock

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These energy infrastructure specialists give clients what they need most — uptime.

In April, the Zacks Analyst Blog identified Houston-based Archrock, Inc. (NYSE:AROC) as a company to watch with a recommendation to buy — and that advice should hold up for several years to come. The current fracking boom is especially advantageous for the 65-year-old natural gas compression equipment and services contractor, the largest in America.

Compression is used throughout the natural gas industry. Used for lifting and collecting gas, circulating gas through production systems and transmitting it through pipelines, and many other applications, the right equipment is essential to successful extraction.

Archrock’s services include wellhead compression, gas lift compression and production, gas gathering compression facilities, field compression gas boosting to sales, gas re-injection for pressure maintenance, compression for gas storage and withdrawal, emergency facilities, and electric drive stations.

With a comprehensive inventory of compressor packages and a next-generation fleet at the ready, Archrock offers its customers 99 percent uptime of compression service availability in its domestic operations. In addition to turnkey services, Archrock hosts field shops throughout the country to ensure the delivery of rapid maintenance services.

The firm’s Compression Installation Services division designs, builds, and installs compressor station solutions, providing all the services customers in every producing region might need, including planning, job site preparation, assembly, and testing.

Markets Under Pressure

The natural gas compressor market in the US, valued last year at $820 million, is expected to rise to $990 million by 2025 at a CAGR of 2.3 percent.

And, with the EIA predicting domestic gas output to rise to its highest ever level in 2020, breaking records for the second year in a row, Archrock is sitting pretty in some of the most productive shale plays and basins in the country, including the Permian, SCOOP/STACK, the Marcellus shale, and Eagle Ford.

As domestic crude oil production rates increase, the need for compression and gas lift equipment and services is also on the rise. Roughly 25 percent of Archrock’s operating fleet is positioned to handle those specific needs.

The company’s strong Q1 showing is indicative of strong market conditions; Archrock’s net income was $19.5 million against $2.1 million in the same period of 2018. In that earnings call, company CEO Brad Childers noted that the need for compression services and technology is expected to garner the firm a 20 percent year-over-year price increase on the high demand equipment their clients require for safe and effective natural gas transportation.

The nation’s largest fracking companies, such as Conoco Phillips, Halliburton, and Chevron, typically seek out compression services providers that meet a variety of high-bar metrics, including cost of capital, life cycle cost, and maintenance costs.

Archrock meets those demands for customers wishing to increase profitability by producing higher volumes of gas with dramatically reduced uptime rates, and lowered operating, equipment, and maintenance costs. Contract service providers help their clients avoid purchasing and retaining expensive equipment in a sharply cyclical industry, and can leverage the talent and expertise of highly qualified technical staff. And when producers can use their capital to build their business rather than spending on CapEx, it’s a win-win all around.

As Childers noted, “One of the largest buildouts of natural gas production infrastructure in the United States, combined with our customers' heightened focus on their expansion, CapEx has created an unprecedented opportunity for our business to support this expansion with our services.”

A major player in the aftermarket services sector, Archrock is also a vital link to keeping compression equipment in tip-top condition. On the aforementioned earnings call, Childers noted, “Our aftermarket services business continues to benefit from supportive market dynamics as customers require maintenance and parts on their compression fleets, particularly in the Permian and the Rockies.

“The strong market and high-level of customer demand is supporting our focus on profitable revenue growth. We continue to expect 2019 activity levels to be similar to or better than those we realized in 2018, and to follow normal seasonal patterns with Q2 and Q3 being our busiest quarters.”

Aftermarket solutions for its customer-owned OEM gas compression equipment include routine maintenance, overhauls, parts, and preventative maintenance parts kits.

In late June, the company announced that it would acquire its fiercest competitor in the space, Elite Compression, LLC of Victoria, Texas, for $410 million in cash and Archrock common stock. The deal adds roughly 430,000 of compression horsepower to the company’s capabilities, which will make it easier for the firm to meet the challenges of the current bull market while further expanding the company’s market dominance.

As part of the deal, which is expected to close in Q3 of this year, Archrock will sell 80,000 horsepower of its non-core compression assets for $30 million in an effort to redirect its compression fleet to large horsepower compression units designed to serve the midstream infrastructure needs of its blue-chip clientele.